Category: Digital Services: Spotify

“[Government] interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding.”

James Madison, The Federalist Papers No. 44

There is a bill in Congress backed by the mega lobbying juggernaut called the MIC Coalition that would force songwriters and artists to “register” with the government in order to protect their rights from the biggest corporations in the world. Failing to do so would take away the stick of statutory damages and an award of attorneys fees to songwriters or artists who are victorious in copyright infringement litigation. Statutory damages and attorneys’ fees are the only real protection that the government gives these creators–the smallest of small businesses.

Why? Because the government does virtually nothing to protect the rights of artists. If it weren’t for statutory damages and attorneys’ fees there would be nothing between a creator and the ravages of mega-corporations. Try calling a U.S. Attorney and asking them to prosecute a massive infringer. If it hasn’t happened yet given the rampant piracy we’ve seen over the last 20 years now, it should tell you that it’s never going to happen with rich corporations that run roughshod over artist rights.

Yet songwriters in particular are some of the most highly regulated workers in America. The government forces songwriters to license their work and sets the price they can license at–yet does nothing to enforce the “compulsory licenses” it imposes on songwriters. Not only is the government in their lives at every turn, songwriters are poorly treated by their government. Why? One reason is that songwriters are among the smallest of small businesses and have little political clout.

That explains why the government imposes wage and price controls on songwriters through consent decrees and rate courts, but forgets to raise their wages for 70 years. Can you imagine how that would go down if the government tried doing the same to auto workers or even the minimum wage?

The Rate that Time Forgot

The government first established the “minimum” statutory mechanical royalty in 1909 at 2¢ per copy. When the government enacted the Fair Labor Standards Act in 1938–twenty nine years later–the government-mandated minimum statutory rate for songs was still 2¢ per copy. The hourly minimum wage was set at 25¢.

The government didn’t get around to raising the minimum statutory rate until 1978–sixty nine years after it was established in 1909–when they raised it from 2¢ to 2.75¢. The hourly minimum wage had then been raised from 25¢ to $2.65. Shortly after, the government started indexing the minimum statutory rate from the rate that time forgot–had the government indexed to the rate of inflation from 1909 to 1978, the rate would have been closer to 13¢, a level it has yet to reach over 100 years after it was first set–today the rate is 9.1¢. And the government has frozen the rate at 9.1¢ since 2006–eleven years ago.

That’s a cruel mess.

What happens if a music user wants to avail themselves of the statutory license but simply refuses to pay the paltry royalty rate? Nothing happens. At least not unless the songwriter or their publisher sues for statutory damages and attorneys’ fees. If you’ve followed the class action cases brought by David Lowery and Melissa Ferrick against Spotify, you’ll know that these cases only involve small songwriters. Now there’s two publishers suing Spotify in Nashville–again, small publishers suing for statutory damages and attorneys fees. Publishers who chose to go it alone rather than take a settlement.

If these plaintiffs didn’t have the statutory damages and attorneys’ fees, do you think anyone in the government would care that the government’s compulsory license was being misused?

We’re From Washington and We’re Here to Help

Individual music users like Amazon, Google, Facebook and Spotify have about as much political clout as any of the other notorious monopolists in history from Standard Oil to United Fruit. As members of the MIC Coalition lobbying group, these companies have the political clout of Big Tobacco, Big Pharma or Big Bombs.

These companies are all part of the MIC Coalition (or are members of other lobbying groups that are). The MIC Coalition is all about this new “government list” that’s supposed to protect small business by crushing small business.

Here’s the pitch on the government database from the MIC Coalition:

The lack of an authoritative public database creates problems for venues and small businesses including restaurants, taverns, wineries, and hotels. For example, venues are declining to host live musicians rather than risk potential liability due to lack of up-to-date and actionable licensing information. The lack of a database is also a challenge for local broadcasters and digital music streaming services that rely on accurate copyright information to provide music to millions of consumers.

The assumption behind this legislation is that if the government just forced all the world’s songwriters and artists to register in the government’s list, that music users would actually use that database. If there’s one common theme in the recent lawsuits against digital services it is that the services don’t seem to use the available data–except to file millions of mass statutory licenses using a loophole in the Copyright Act. The users spend big bucks to claim they can’t find the copyright owner of the songs they use in the current Copyright Office records and seek the government’s cover from lawsuits as if they were legitimate users.

If they put the same effort into finding the songwriters that they do into filing millions of mass NOIs, these services might not have so many problems. And instead of removing the loophole, the government now floats this “government list” database idea to create an even more complicated loophole at taxpayer expense.

Reject the 11th Century Solution to a 21st Century Problem

It’s important to realize two key causes for the licensing mess the government has created through over-regulating songwriters, one of which is not entirely the government’s fault.

The Government Should Allow Statutory Licensing by ASCAP and BMI: Because the government imposes a near-compulsory license through consent decrees against songwriters who are members of the two largest performing rights societies (ASCAP and BMI), a perfect opportunity to streamline the compulsory license is simply lost. The government’s courts that supervise songwriters actually prohibit ASCAP and BMI from engaging in compulsory licensing. If these PROs were allowed to issue licenses for all the rights digital services need, that would be a meaningful step forward.

This would make ASCAP and BMI similar to SESAC which can issue both performance rights licenses and mechanical licenses after SESAC’s acquisition of the Harry Fox Agency. SESAC is not subject to a consent decree. The MIC Coalition didn’t like that either and complained to the Department of Justice seeking an investigation into stopping an idea that could work.

Require Music Users to Search the PRO Databases for Song Ownership before Serving Address Unknown Mass NOIs at Taxpayer Expense:There is nothing in the “government list” bill that actually requires music users to search or document that they have searched this new database. Current law requires a search of at least the Copyright Office records (which Amazon, Google, Pandora, Spotify, Microsoft, iHeart and others are supposedly doing already by the millions) and in some circumstances permits a search of the performing rights society databases as well (see 37 CFR Sec. 201.10 h/t Richard Perna).

It is a short leap to require music users to search the publicly available databases of ASCAP and BMI as well as the public records of the Copyright Office before serving millions of address unknown NOIs on the Copyright Office. This will be particularly relevant given the recently announced voluntary cooperative effort between ASCAP and BMI to combine their repertory databases (which could include other PROs). While there is some complaining from MIC Coalition members that ASCAP and BMI won’t indemnify users of their databases for the accuracy of the data, that dog won’t hunt.

That simply isn’t true for parties to the ASCAP and BMI licenses, which after all is why the databases are created in the first place. Since ASCAP and BMI have no idea what use anyone may make of the data and if that use is even authorized by the song or recording owners, how could they possibly be expected to indemnify all users for any use in any country of any song? Those databases are not a search engine. Nobody else does that, especially not search engines, e.g., Google’s disclaimer:

Our Warranties and Disclaimers

We provide our Services using a commercially reasonable level of skill and care and we hope that you will enjoy using them. But there are certain things that we don’t promise about our Services.

OTHER THAN AS EXPRESSLY SET OUT IN THESE TERMS OR ADDITIONAL TERMS, NEITHER GOOGLE NOR ITS SUPPLIERS OR DISTRIBUTORS MAKE ANY SPECIFIC PROMISES ABOUT THE SERVICES. FOR EXAMPLE, WE DON’T MAKE ANY COMMITMENTS ABOUT THE CONTENT WITHIN THE SERVICES, THE SPECIFIC FUNCTIONS OF THE SERVICES, OR THEIR RELIABILITY, AVAILABILITY, OR ABILITY TO MEET YOUR NEEDS. WE PROVIDE THE SERVICES “AS IS”.

SOME JURISDICTIONS PROVIDE FOR CERTAIN WARRANTIES, LIKE THE IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. TO THE EXTENT PERMITTED BY LAW, WE EXCLUDE ALL WARRANTIES.

If the government wants to tinker with the Rube Goldberg system of music licensing that it has imposed on songwriters, it could start by making these two changes before imposing a 21st Century version of William the Conqueror’s Domesday Book, the Great Survey of England conducted in 1088.

Oh, and if they’re so fired up about forcing people to do things through regulation, why not force music users to license, pay and account in compliance with the law.

Longtime PRO opponent Rep. Sensenbrenner introduced a bill entitled “The Transparency in Music Licensing and Ownership Act“, a piece of work that is Dickensian in its cruelty, bringing a whole new meaning to either “newspeak” or “draconian,” take your pick. It’s rare that the Congress can accomplish the hat trick of an interference with private contracts, an unconstitutional taking and an international trade treaty violation all in one bill. But I guess practice makes perfect. And since the MIC Coalition gave the bill a rousing cheer followed by a heaping serving of astroturf, we should not be surprised. (Read the bill here.)

While this legislation currently applies only to songs and sound recordings, other creators should not feel that they’ve dodged a bullet. I hear that the House Judiciary Committee staff is planning on closing the loop and making all copyright categories subject to the same “register or lose it” approach favored by Lessig, Samuelson and their fellow travelers. If you thought that we are in an era of the triumph of property rights, that must be a different Congress you’re thinking of.

The bill perpetuates the myth of the “global rights database” that no one who understands the complexities believes will ever be created. It sounds logical, right? We have county recorders for real estate, the DMV for cars, why not a database for music?

That is an 11th century idea being welded onto a 21st century problem, the Domesday Book meets a unicorn. The problem isn’t knowing who owns a particular work which evidently is either what they believe or want you to believe.

The problem is that the users don’t want to seek permission or beg forgiveness, either. They want to get away with it. This bill demonstrates that unassailable fact in colors bold as the Google logo.

Think about it–by the time you finish reading this post, 1000 songs will be written and 500 songs will be recorded somewhere out there in the world. Or more. (Not to mention photographs taken, paintings painted, chapters written and so on.)

Do you think that songwriters around the world are thinking, now I know what lets do, let’s rush to go register that new song in the U.S. Copyright Office–in the database, the registration section, the recordation section? Otherwise, I’ll never be able to afford the lawyer to sue Spotify if they don’t pay me. I don’t think they’re thinking that at all and are about to fall into the MIC Association’s trap for the unwary. Why the MIC Coalition? We’ll come back to them.

MIC Coalition Members

In a nutshell, the bill requires the extraordinarily heavy burden of requiring all songwriters and recording artists (or their publishers or labels)–all, as in the entire world seeking to sue in the U.S., not just the US writers–to register numerous fields of data in a yet to be created database if they plan on suing for statutory damages:

[I]n an action brought under this title for infringement of the exclusive right to perform publicly, reproduce, or distribute a nondramatic musical work or sound recording, the remedies available to a copyright owner [ANY copyright owner] that has failed to provide or maintain the information [required] shall be limited to…(A) an order requiring the infringer to pay to the copyright owner actual damages for the public performance, reproduction, or distribution of the infringed work; and…(B) injunctive relief to prevent or restrain any infringement alleged in the civil action.

That means if you haven’t undertaken the formality of registering in this new database, then the user has no exposure to statutory damages and will not have to pay the victorious songwriter or artists attorneys’ fees. And this new safe harbor applies apparently even if that songwriter or artist has filed a copyright registration under existing law.

There is nothing in the bill that actually requires the protected class to actually look up anything in this new database, or actually be in compliance with existing statutory licenses (such as the webcasting or simulcasting licenses).

So who is in the new protected class entitled to the Nanny State’s protection from those collusive and pesky songwriters and artists? Let’s look at the victimology of the “ENTITLEMENT” paragraph.

Well, actually, there’s no “ENTITLEMENT” paragraph for the entitled, it’s actually called “APPLICABILITY” (see “newspeak”, WAR IS PEACE, etc.). The connected class includes five different categories of cronies.

First, the defined term “An establishment” gets the new even safer harbor. “Establishment” is a defined term in the Copyright Act (in Sec. 101 for those reading along at home):

An “establishment” is a store, shop, or any similar place of business open to the general public for the primary purpose of selling goods or services in which the majority of the gross square feet of space that is nonresidential is used for that purpose, and in which nondramatic musical works are performed publicly.

Like the members of this organization, the National Retail Federation:

Then another defined term “A food service or drinking establishment”. Kind of like these people:

That is, the National Restaurant Association, the American Hotel and Lodging Association (aka those who put their kids through college thanks to SXSW) and their suppliers, the American Beer, Wine and Spirits Retailers.

Next, “A terrestrial broadcast station licensed as such by the Federal Communications Commission”. I guess that would include the National Association of Broadcasters, iHeart, Salem and Cox (which of course raises the question of whether this entitlement also applies to Cox’s Internet group), kind of like these people:

Don’t forget “An entity operating under one of the statutory licenses described in section 112, 114 [webcasting and simulcasting], or 115 [mechanical licenses].” Note–not that the statutory license applies to the particular song or sound recording in the way it is used that is the subject of the lawsuit, just that the entity is operating some part of its business under one of those licenses regardless of whether the service that is the subject of the lawsuit operates under one of these licenses or not. (Pandora’s on-demand service compared to webcasting, for example, could be out of compliance with its sound recording licenses but claim the safe harbor because it is “operating under” one or more of the statutory webcasting license in the radio service or the statutory mechanical licenses for songs.)

It appears that would include these people:

and don’t forget these people who are DiMA members and need the government’s protection from songwriters and artists:

And then I guess you could throw the Consumer Technology Association and CCIA in there, too.

So I think that’s everyone, right?

Last but not least there’s this group as “belt and suspenders”:

An entity performing publicly, reproducing, or distributing musical works or sound recordings in good faith as demonstrated by evidence such as [i.e., but not limited to] a license agreement in good standing with a performing rights society or other entity authorized to license the use of musical works or sound recordings.

Note: The license need not be for the musical works or sound recordings for which the “entity” is being sued, just any license for any musical works or sound recordings.

There are loopholes in the bill that you could drive a fleet of Street View cars through, so you have to assume that the loopholes will be hacked given who is involved. Don’t let anyone tell you “oh that’s just legislative language, we can fix that.” The whole thing has to be voted down.

Let’s call this bill what it is: Crony capitalism, the triumph of the connected class. The Domesday Book writ large.

It’s some of the biggest companies in the world deciding that they don’t want to hear from songwriters or artists anymore.

Spotify just can’t seem to catch a break in the artist community. A story broke on Vulture evidently based on a Music Business Worldwide post alleging (and I’m paraphrasing) that (1) Spotify commissions artists to cover hits of the day and (2) there’s a lot of sketchy material on Spotify that trades on confusing misspellings, “tributes” and other ways of tricking users into listening to at least 30 seconds of a recording. Which means that Spotify isn’t that different than the rest of the Internet. (Thank you DARPA, the people who gave you the Internet. And Agent Orange. The real one.)

Spotify of course has issued a denial that I find to be Nixonian in its parsing. Let’s not go crazy on this, but here’s the first part, according to Billboard:

“We do not and have never created ‘fake’ artists and put them on Spotify playlists. Categorically untrue, full stop,” a Spotify spokesperson wrote in an email.

Nobody said Spotify “creates” “‘fake artists,'” and the accusation was that the fake artists were on the service AND on some playlists, not just playlists. The allegation is that Spotify commissions recordings.

“We pay royalties — sound and publishing — for all tracks on Spotify, and for everything we playlist. [If Spotify commissioned the fake tracks, they would also “pay royalties”.] We do not own rights, we’re not a label, all our music is licensed from rightsholders and we pay them — we don’t pay ourselves.”

Notice the switch to “rights holders” which would include either publishing or sound recordings. If Spotify commissioned fake artists they would not need to “own rights” and they could easily have “licensed” the fake artists recordings. Cover songs would require an…ahem…NOI for the compulsory license. And the commission payment could go to the artist as a buyout so Spotify would “pay them”. If the object was to increase traffic for their ad supported service, commissioning recordings would both increase traffic AND reduce the prorata share of advertising revenue by making the denominator larger for everyone with a revenue share during that accounting period. I don’t want to go too far down that rabbit hole, but there are some odd loose ends.

Leave the holes in Spotify’s denial to the side. The core problem identified by the Vulture post is the same for Spotify as it is for Google, YouTube, Facebook, all the other Internet companies that require “scale” to succeed, and which are, one way or another, hell bent on being monopolists. The second part of Spotify’s denial in Billboard could apply to this lack of monitoring:

“As we grow there will always be people who try to game the system. We have a team in place to constantly monitor the service to flag any activity that could be seen as fraudulent or misleading to our users.”

Maybe that “team” could have a role in “monitoring the service” for tracks before the recordings get on the service rather than after. Noah built the Ark before the rain.

It must be said that it sounds a bit implausible that Spotify would commission this type of recording to avoid paying artist royalties on the fake tracks. Such an affirmative act would require a commercially tortured logic because the royalty offset on those specific tracks would be so tiny that the cost of the commissioned recordings would have to be very, very low. One guy with Garageband in Mom’s basement kind of low. How much the prorata revenue share would be reduced is hard to know from the outside.

But even if Spotify doesn’t hire studio musicians to perform “fake hits”, it appears that they are allowing a lot of sketchy recordings onto the service. One might ask how those recordings get there in the first place. I would bet that the explanation is pretty much that nobody bothers to check before the recordings are posted (or “ingested” in the vernacular, if you can stand that word).

So while there is a major difference in degree of harm, there isn’t a great deal of difference between what seems to be happening on Spotify with sketchy recordings and the links to illegal materials that the Canadian Supreme Court just blocked on Google Search, promoting the sale of illegal drugs for which Google paid a $500,000,000 fine and narrowly avoided prison, ISIS recruiting for which Google lost a chunk of market cap (at least for a while), human trafficking on Craig’s List and fake news on Facebook. Each of these services operate at scale and they seem to have the same problem: No one is minding the store and there are no or poorly enforced standards and practices that are only enforced after the harm has occurred.

The other trait that all these companies have in common to one degree or another is that they are all at least dominant if not monopolies in their markets.

Remember–on May 12, 2014, Spotify’s director of economics Will Page gave a presentation at the Music Biz Conference in Nashville. As reported by Billboard, Will Page gave the audience a good deal of evidence of Spotify’s domination of the online music market:

Spotify claims to have represented one out of every ten dollars record labels earned in the first quarter….Page’s claim shows the speed at which subscription services are gaining share of the U.S. market. According to IFPI data, all subscription services accounted for 10.2 percent of U.S. recorded music revenue in 2014. If Spotify had a 10-percent share in the first quarter, it’s safe to say the overall subscription share is well above the 10.2 percent registered last year.

Much of Page’s presentation seemed aimed at Spotify skeptics in the audience. While explaining how streaming “is no longer an outlier in the business,” Page noted Spotify has launched in 32 of the 37 countries where streaming is the primary digital source of revenue. Page also pointed out that Spotify is half of the $1.5 billion global subscription streaming market. In the U.S. market, Spotify made up approximately 90 percent of last year’s growth in subscription revenue, according to Page.

These numbers suggest that while Spotify may have a significant share of overall U.S. recorded music revenue, Spotify is clearly dominant if not a monopoly in the global subscription market with its now 100 million plus users and probably is at least dominant if not a monopoly in the U.S. music subscription market.

So how does Apple address these problems? If you consult the iTunes Style Guide, you’ll see that iTunes expressly prohibits the use of search terms or keywords in track title metadata (like “Rock Pop Indie Rock”) or an artist name (like “Aerosmith Draw the Line). Audio files have to match track titles on each album delivered. “All track titles performed by the same artist on an album must be unique, except for different versions of the same track that are differentiated by Parental Advisory tags.“ And most importantly, perhaps, “the name of the original artist must not be displayed in any artist field on the track level or the album level.” Why these rules? One reason might be that Tunecore has encouraged their users for years to use covers as a way of getting noticed in searches on music services (with suitable admonishments to not “trick” fans).

Let’s face it–there’s only one way to keep your service clean. Don’t let the bad stuff on in the first place. You may think that it should be self evident that allowing sketchy recordings, ISIS videos or human trafficking on your service is a bad thing. You may think that it should be self evident that allowing someone to change a letter in an artist’s name to trade on their reputation is a bad thing–not that different from typo squatting. You may think that it is self evident that promoting the sale of illegal drugs is a bad thing. And you may think that anyone who wants to engage in commerce with the legitimate commercial community, much less the artist community, wouldn’t allow these travesties into their business.

But you would be wrong. Probably because you don’t worship at the alter of the great god Scale.

The Music Managers Forum UK have criticized the “secrecy” arounds Spotify’s deals with major labels. According to Complete Music Update:

The UK’s Music Managers Forum yesterday welcomed the news that Spotify had reached a new deal with Universal Music. However, the trade body criticised the continued secrecy that surrounds the deals made between the major record companies and the streaming services. This secrecy means that artists signed to or distributed by those labels are not allowed to know the specifics of how their music is being monetised.

The same criticism could equally be made of non-statutory, statutory, or direct agreements by digital aggregators like CD Baby, Tunecore, LyricFind, Pledge Music, the Orchard and Loudr, each of which offer varying degrees of transparency of their own books, much less the deals they’ve made with digital services on behalf of the artists, songwriters, labels and music publishers appointing them as agents for relicense of music. (Loudr, for example, has recently started participating in the most obscure licensing process of all, the mass NOI registrations with the Copyright Office. Read more about that on another series of MTS posts or my recent article in an American Bar Association journal. At least with mass NOIs, songwriters know what their royalty is–zero.)

Mass NOI Filings by PK Interactive on behalf of Loudr

It is probably fair to say that there is no disclosure of the actual terms of the direct licenses between these aggregators and the services concerned. It may also be possible that no one has ever asked the aggregators for the terms of their deals.

That’s a real head scratcher because arguably those aggregators have an even greater obligation to disclose these terms given they cater to many artists, songwriters, music publishers and labels who are unlikely to have the means–even if they have the right–to conduct a royalty examination of any of these companies. However big a problem anyone has with major labels, every major label artist and major publisher songwriter takes their “audit” rights for granted.

It would be very simple for aggregators to disclose the terms of their deals or to at least summarize them so that artists or songwriters who are considering who to sign with could compare payouts. It’s fine to tell people what their royalty split, flat fee, or distribution fee might be, but the assumption is that the revenue stream being shared is identical from one aggregator to another.

Also remember that it is common for music services to pay “nonrecoupable” payments to labels–just like it was for record clubs. This comes in the form of “breakage” or “technology payments” or other ways to keep the money from being called a royalty. We know this very likely happens with major labels although the amounts are not disclosed–hence the MMF UK’s beef. We have no way of knowing if it happens with digital aggregators or even what the basic terms of the deals are, which makes it difficult to conduct a desktop audit (the precursor to a full-blown field audit), much less an exhaustive royalty examination.

So let’s not limit the transparency concern to just the major labels. The digital aggregators could easily lead the way forward by posting the terms of their deals with digital services. Unless of course the problem lies as much with the digital services as it does with the labels.

Copyright reform is on the front burner again after the passing of the Register of Copyrights Selection and Accountability Act by a vote of 378-48. But there’s another problem the Congress needs to fix that won’t require legislation in the short run: The mass filing of tens of millions of “address unknown” notices under the archaic compulsory license for songs.

I’m going to assume that readers know the general background on the millions of “address unknown” NOIs filed with the Copyright Office under a loophole in the Copyright Act (Sec. 115(c)(1)). If that is Geek to you, see my recent paper on mass NOIs for more complete analysis (or previous posts on MTS for the armchair version of the story. The first distinction to remember is that we are only concerned in this post with song copyrights and not the sound recording. This story implicates songwriters and publishers, not artists and record companies, and it only applies to the government’s compulsory license for songs, a uniquely American invention.

In a nutshell, Amazon, Google, Pandora, Spotify and other tech companies are serving on the Copyright Office tens of millions of “address unknown” notices of intention to obtain a compulsory license to make and distribute recordings of certain types of songs. Under what can only be called a “loophole” in this compulsory license, a service can serve these “address unknown” NOIs on the Copyright Office if the owner is not identifiable in the Copyright Office public records. The Copyright Office stands in the shoes of the “address unknown” copyright owner to receive and preserve these notices.

On the one hand companies like Amazon, Google, Pandora and Spotify say that they can’t find these millions of song owners, while at the same time at least some of the same companies brag about how comprehensive and expensive their song databases are (like Google’s Content ID) or their agents puff up the agent’s own massively complete song databases as “the worlds largest independent database of music copyright and related business information.” And yet, these same companies and their agents can’t seem to find songwriters whose names, repertoire and contact information are well known, or whom they already pay through their own systems or through their agent.

The Database Double Loophole Trick

Here’s the loophole. First, the loophole requires a very narrow reading of Section 115(c)(1) of the Copyright Act, a 40 year old statute being applied to NOIs served at a scale the Congress never intended. If the song owner isn’t found in the public records of the Copyright Office, even if the digital service or its agent has actual knowledge of the song copyright owner’s whereabouts, the digital service can say they are not required to look further.

Even if you buy into this willful blindness, these digital services may not be looking at the complete public records of the Copyright Office. The only digitized records of the Copyright Office are from January 1, 1978 forward, and my bet is those easily searchable records are the only records the services consult. That omits the songs of Duke Ellington, Otis Redding, The Beatles and five Eagles albums not to mention a very large chunk of American culture.

The Copyright Office records from before 1978 are available on paper, so the pre-78 songs are still in the public records (which is what the Congress contemplated in the Copyright Act).

The identifiers are just not “there” if you decide not to look for them. However, it is not metaphysical, it is metadata that exists in physical form. This is the “double loophole”.

The Double Triple: New Releases

Another category of song copyrights that will never be in the public records of the Copyright Office in their initial release window are new releases with recently filed but not yet finalized copyright registrations. The Copyright Office itself acknowledges that it can take upwards of a year to process new copyright registrations. This allows “address unknown” filers to bootstrap a free ride on the back of Congress during that one-year period.

No Liability or Royalties Either: Trebles All Round

Once a company serves the “address unknown” NOI on the Copyright Office, songwriters are arguably compelled by the government to permit the service to use their songs. Filing the “address unknown” NOI arguably allows the service to avoid liability for infringement and also–adding insult to injury–to avoid paying royalties. If the NOI is properly filed, of course.

In current practice, a mass “address unknown” NOI is usually a single notice of intention filed with a huge attachment of song titles with the required fields, such as this one Google filed for Sting’s “Fragile”, the anthem of the environmental movement (which was clearly filed incorrectly as the song was registered long ago):

The number of mass “address unknown” NOIs being posted by the Copyright Office on an almost daily basis suggests that tech companies now view mass “address unknown” NOIs as the primary way to put one over on songwriters and the Congress, too. Companies like Amazon, Spotify, Google, Pandora and others are using this heretofore largely unused loophole on a scale that flies in the face of Chairman Goodlatte’s many hearings in the last session of Congress on updating the Copyright Act.

Congress can play a role in in providing immediate relief to songwriters by stopping the mass “address unknown” NOIs or at least requiring the Library of Congress and the Copyright Office to take steps to verify the NOIs are filed correctly.

At the moment, the government takes away property rights from the songwriters by means of the compulsory license without taking even rudimentary steps to assure the public that the “address unknown” NOI process is being implemented correctly and transparently.

Here are five steps the Congress can take to rectify this awful situation.

Stop Selling Incomplete Data: Congress should instruct the Library of Congress to stop selling the post 1978 database until due diligence can be performed on the database to determine if it is even internally correct. It appears that many if not all the mass “address unknown” NOI filers use the LOC database to create their NOIs. It is also highly unlikely that this database will include new releases. Congress can simply instruct the Librarian to stop selling the database.

Stop Accepting “Address Unknown” NOIs With Compressed File Attachments: Congress should instruct the Library of Congress and the Copyright Office to immediately cease accepting “address unknown” NOIs with compressed files as attachments for what appears to be a single NOI. These compressed files are so large in most cases that songwriter can never uncompress them on a home computer to determine if their songs are subject to “address unknown” NOIs. Google in particular is a major offender of filing huge compressed files. Each compressed file contains tens of thousands of song titles.

Require Accounting Compliance with Copyright Office Regulations: Long standing regulations require that anyone relying on an NOI must file mostly and annual statements of account reflecting usage of the songs subject to the NOIs. The tech companies serving mass NOIs are not rendering these statements and thus fail to comply with the transparency requirements of Copyright Act. All of the “address unknown” NOIs served during 2016 are out of compliance with the regulations, and all “address unknown” NOIs served in the first quarter of 2017 are likewise out of compliance. Congress should instruct the Copyright Office to require monthly and annual statements of account be filed with the Copyright Office for anyone who has relied on these NOIs as required by the regulations. All statements of account should be certified in the normal course as required by the regulations, and made available to the public by posting to the Copyright Office website.

Require the Library of Congress to Create a Searchable Database of NOIs:Congress should instruct the Library of Congress to create a single database maintained online that is maintained by an independent third party and is searchable by songwriters in a manner similar to a state unclaimed property office. That database needs to be updated on a regular schedule. Given the size of the compressed files served to date, it is essentially impossible for songwriters to determine if NOIs have been filed on their songs. This is particularly true as the NOIs are served on an effectively random basis, so even if songwriters were able to search, they would essentially have to search all the time.

Pay Royalties Into A Permanent Trust Account: Given that it is highly likely that the mass NOIs filed to date have a significant number of errors, it is also likely that songwriters will become entitled to payment of royalties retroactively if these errors are ever caught. Therefore, the Congress should require that royalties should be paid to a trust account maintained at the Copyright Office and held in perpetuity like a state unclaimed property office. Of course, it is equally likely that the song copyright owners will be entitled to terminate any purported license under 17 USC Sec. 115(c)(6). These payments should be based on actual usage and not black box. This is another reason why the statements for “address unknown” NOIs should be public.

What started in April 2016 as a trickle of NOIs from a handful of companies has now expanded exponentially. Based on Rightscorp’s analysis in January 2017, some 30 million “address unknown” NOIs had been filed–and that did not include the dozens of “address unknown” NOIs filed by Spotify in March 2017 alone which themselves likely total over a million songs.

NOI Table

Top Three Services Filing NOIs

April, 2016-January 2017

Number of NOIs Per Service

Amazon Digital Services LLC

19,421,902

Google, Inc.

4,625,521

Pandora Media, Inc.

1,193,346

It is rapidly becoming standard practice for tech companies to try to pull the wool over the eyes of the Congress by leveraging an apparent loophole and they are doing it on a grand scale.

As we have seen with everything else they touch from the DMCA to royalty audits, the tech companies will continue this loophole-seeking behavior until they are forced to stop. Since no one at the Library of Congress seems to have the appetite to right this wrong, the Congress itself must step in.

Ultimately Congress should fix the loophole through legislation, but in the meantime most of the harms can be corrected overnight by policy changes alone.

The Wall Street Journal and other business news outlets are reporting that the much anticipated Spotify initial public offering may not look like what everyone was expecting and may end up not looking much like what almost everyone was thinking it would look like.

If you asked anyone in the music business over the history of Spotify, they would probably tell you that this time was different. This time MTV wasn’t going to build a business on our backs–we had the Spotify stock. So if the “tech guys” go into their mysterious counting house and come out with billions, then the people who built and invested in the one product that they all depend on would be treated fairly this time. The people who really invested in the only product these companies sold–music–would be along for the ride.

Time will tell if that will turn out to be true, but it’s starting to look like there are some serious questions about what will be in the pot at the end of the rainbow, or even if the rainbow will actually end at all.

The assumption all along has been that Spotify will float what’s called a “full commitment underwriting” as opposed to a “busted underwriting” aka Deezer. In a full commitment underwriting, an underwriter (like Spotify banker Goldman Sachs) agrees to buy all the shares of the issuing company that are available–generally less than all, maybe around 25% of the shares issued and outstanding on an “as-if-converted” basis (an important distinction in Spotify’s case that we will come back to).

What actually happens then is that the issuer doesn’t actually sell shares to the public in the traditional sense, they instead sell shares to underwriters who then sell the shares to the public. The underwriters usually have a lead (like Goldman Sachs) who then puts together an underwriting syndicate to buy up all the shares that are available.

The proceeds, aka money, from those shares sold to the underwriters go into the issuing company’s treasury, aka bank account. Thus the primary function of the IPO is fulfilled-raising money for the issuing company. The company passes the market risk to the underwriters in return for locking in a share price. So far the shares have not be available to trade, although all of the regulatory hurdles will have been met by this point, SEC clearances, etc. (a final approved Form S-1, for example).

The underwriters then sell the shares are then registered for sale to the public by licensed broker dealers with the idea that the underwriters will get at least a “2 handle” or “3 handle” on the first day of trading because there is a lot of enthusiasm for the stock with the retail stock market. That means that the underwriters will double or triple their money (give or take) overnight, plus get some nice fees for doing the work and taking the market risk off of the issuer’s books.

The underwriters don’t want a whole bunch of shares of stock crowding into the market and interfering with the 2x or 3x (or more x) that they plan on making. That’s why issuers have lock up agreements with certain investors (especially insiders) that prevent the sale of shares for anywhere from 90 to 180 days after an IPO. That’s also why there are some executives (like Pandora’s Tim Westergren) who sell a predetermined number of shares on a predetermined date, which is almost always a sign of a “10b5” agreement that allows insiders to gradually cash out over a fairly long period of time (while not “trading” as in both selling and buying the company’s shares).

So what does all this mean for Spotify? According to the Wall Street Journal, Spotify is not going the full commitment underwriting route at all–but remember, none of this is coming from the company directly, so they could still back out. But they’re not denying the story so far.

Spotify evidently is skipping the underwriting step altogether. MTS readers will recall in our “Spotify IPO Watch” series that I was skeptical about Spotify’s ability to put together an underwriting syndicate, and the decision to skip an underwriter is being passed off as a way to save some millions in fees. That’s whistling past the graveyard–those fees are high, but are more than justified if the IPO raises a bunch of money which is usually the point.

The Swedish company, last valued at $8.5 billion, is seriously considering not holding a public sale of shares. Instead it is exploring simply listing its shares on an exchange in what is known as a direct listing, according to people familiar with the matter. It wouldn’t raise money—the hallmark of an IPO—or use underwriters to sell the stock.

The approach has advantages for Spotify and its existing investors. It could enable the firm to save tens of millions of dollars in underwriting fees, prevent its existing holders from having their stakes diluted, and enable executives to publicly tout the company ahead of its listing, unlike a strictly regulated IPO, the people said….

In direct listings, early investors would be subject to less stringent lockups governing the sale of insiders’ shares and the company could avoid the first-day trading pop that characterizes many IPOs shepherded by underwriters. They are good for some investors but also indicate a company potentially left money on the table. Having a public stock would also give Spotify’s investors and employees the opportunity to cash in their shares.

There are risks to this approach, whose consideration by Spotify was earlier reported by Mergermarket. With market forces determining the share price from the outset, the company’s public debut could be more volatile and unpredictable. Also missing would be the large blocks of stock underwriters typically allocate to investors they believe will hold the shares for the long term and promote trading stability.

Spotify last year issued a $1 billion convertible bond to parties including TPG and Dragoneer Investment Group. The interest rate of 5% increases 1 percentage point every six months until the company goes public, giving it a potential incentive to pursue a listing sooner rather than later. If it lists directly, Spotify would likely need to renegotiate terms of the facility, one of the people said.

Spotify had agreed that the investors could convert the debt into equity at a 20% discount to the share price if an IPO takes place one year hence. If it takes place later, the discount increases. Since this wouldn’t be a typical public offering, it may not trigger a conversion. So Spotify may need to negotiate with the investors a price at which they would receive equity.

I find it hard to believe that sophisticated investors like Texas Pacific Group and Dragoneer will be bamboozled by Spotify taking a loophole on their IPO. The rest of the shareholders–hard to say.

One thing is almost certain–that “need to negotiate” the WSJ refers to is almost certainly going to result in more stock or cash or relief from lockups or some preferential goodie going to the bond holders who very likely have a first position security interest on all the assets of the company as collateral for their $1 billion plus loan. (Assuming, of course, that a direct registration doesn’t constitute an event of default under the loan that could allow the bondholders to take over the company.)

It is also almost certainly going to result in other “investors”–the stock for royalties folk–not getting those same benefits.

Stay tuned–Spotify may give us the best argument yet for not taking equity-in-lieu of cash in companies that should be paying royalties like everyone else.